Ugro Capital Q1 FY26: The Strategic Pivot That Could Redefine MSME Lending & Boost Investor Returns

As the Indian market navigates a nuanced landscape – a strong Q1 rally giving way to July corrections amidst global uncertainties and cautious domestic guidance – investors are keenly watching for companies that can balance growth with prudence. This quarter, Ugro Capital, a prominent NBFC focused on MSME lending, presented an earnings report that speaks volumes about strategic positioning and a deliberate shift towards quality, even if it means a temporary adjustment in some key metrics.

Let’s dive into Ugro Capital’s Q1 FY26 performance, deciphering the strategic moves that shaped the quarter and what they might mean for future earnings.

Disbursements & AUM: A Measured Pace for Quality 📈

Ugro Capital’s Assets Under Management (AUM) grew a robust 31% year-on-year to Rs. 12,081 crores. This is a solid indicator of continued market penetration and demand for its financial products. However, the narrative around disbursements is particularly telling.

While Q1 FY26 disbursements clocked in at Rs. 1,599 crores, a decent jump from Rs. 1,146 crores in Q1 FY25, they saw a sequential decline from Rs. 2,436 crores in Q4 FY25. This wasn’t a stumble, but rather a deliberate strategic choice by management. Facing elevated borrower leverage in some segments, Ugro consciously tightened its underwriting filters and curtailed disbursements, particularly in the unsecured portfolio.

Our Take: In a market increasingly prioritizing quality and sustainable growth, this is a commendable move. It signals management’s capability to pivot and prioritize long-term asset quality over short-term disbursement targets. This aligns well with the broader market sentiment of cautious guidance and a focus on “stock-picking critical; valuation comfort + earnings visibility” that’s currently at play in India. The company is actively managing risk, a positive change.

Strategic Growth Drivers: Acquisition & Capital Infusion 🚀

The quarter was defined by two significant strategic initiatives designed to fuel future growth and enhance the balance sheet:

• Profectus Capital Acquisition: Ugro Capital announced an all-cash acquisition of Profectus Capital for approximately Rs. 1,400 crores. This is a game-changer. Profectus brings Rs. 3,468 crores in AUM, expands Ugro’s footprint across 7 states and 28 branches, and, critically, adds expertise in school finance, an underserved segment with an estimated Rs. 2,000 crores growth potential. This acquisition is expected to bolster Ugro’s secured asset mix and accelerate its journey towards a medium-term AUM goal of Rs. 20,000 crores, with a potential to improve ROA in FY27.
• Capital Raise: The company successfully completed a rights issue of Rs. 381 crores and is in the process of a preferential issue of Rs. 911 crores. This substantial capital infusion has boosted the Capital Adequacy Ratio (CAR) to a healthy 22.4%.

Our Take: These moves demonstrate a proactive management team. The acquisition is a clear signal of inorganic growth ambition, strategically targeting segments like school finance that align with domestic growth themes. The capital raise ensures that this ambitious growth is adequately supported, providing a strong buffer and the financial muscle needed to expand without compromising quality.

Portfolio Health & Operational Focus: Digging Deeper 🔍

Ugro Capital’s focus on “emerging market small-ticket Loan Against Property (LAP) and embedded finance” is central to its strategy.

• Asset Quality: Despite the market dynamics, portfolio quality remained largely intact. Gross NPA stood at 2.5% and Net NPA at 1.7%, well within internal estimates. The identified stress in the unsecured portfolio led to the aforementioned tightening of underwriting, which should prevent future erosion.
• Portfolio Mix: Approximately 70% of the book is secured, primarily against self-occupied residential, commercial, and industrial properties, with an average Loan-to-Value (LTV) of around 55%. This secured base provides stability.
• Emerging Market Branches: With 309 locations as of June 2025 (up from 150 in FY24), Ugro’s granular approach is visible. Insights into branch vintage show that mature branches (>18 months) have significantly higher AUM per branch (Rs. 15.4 crores vs. Rs. 3.4 crores for newer branches) and lower credit costs. This indicates a clear path to operational leverage as newer branches mature, with 121 branches already having broken even.
• Embedded Finance: This is a shrewd play. Leveraging existing payment ecosystems (like PhonePe) to access transaction histories of small retailers, this daily repayment product with an average ticket size of less than Rs. 2 lakhs boasts a current credit cost of ~3% and a net yield of ~16.5%. The potential for a 5% ROA from this segment is impressive, and Ugro aims for it to constitute 10-12% of total AUM in 2-3 years.

Our Take: The detailed operational metrics around branch performance and the strategic push into embedded finance highlight management’s hands-on approach. The ability to identify and address stress in the unsecured portfolio, coupled with a dominant secured book, reflects prudent risk management. The embedded finance segment is an exciting growth engine, offering high yields and scalability.

Navigating the Regulatory Landscape: Co-lending Adjustments 🚧

The new RBI co-lending guidelines (January 2025) are a double-edged sword:

• Positives: They provide regulatory clarity, allow for first-loss cover to banks (potentially boosting volumes and reducing net costs for NBFCs), open co-lending to all asset classes, and are expected to be very ROE-positive.
• Challenges: Management anticipates a 1-2 quarter disruption to reset processes, mainly due to changes required in distribution architecture for partner selection at origination. There’s also the “blended rate” concept, which might lead to some transmission of lower bank lending costs to customers.

Our Take: This is a crucial area of change. While the short-term disruption is a headwind, the long-term implications are overwhelmingly positive, allowing Ugro to achieve higher leverage and better ROE without additional capital. Management expects disbursement momentum to pick up from Q2 FY26 as they adapt to these new rules. This demonstrates resilience and adaptability in a dynamic regulatory environment.

The Bottom Line: Earnings & Future Outlook 📊

Ugro Capital reported a Profit After Tax (PAT) of Rs. 34.1 crores, up 12% year-on-year. Net Total Income grew 31% year-on-year to Rs. 216.5 crores. Credit cost, while up 44% YoY to Rs. 47.7 crores, was sequentially lower than Q4 FY25, again reflecting the focus on quality.

• ROA Target: Excluding the impact of new branch expansion, Q1 FY26 ROA would be at 2.3%. The company holds a longer-term target of 4% ROA, which it expects to achieve through the Profectus acquisition, operational leverage as emerging market branches mature, and a reduction in OPEX to AUM.
• Net Yield & Cost of Borrowing: Expected to increase by 0.25-0.5% in the coming year, driven by the higher-yield emerging market and embedded finance businesses. The cost of borrowing, which has been elevated, is expected to improve with increased scale and maturity, enabling better negotiation power with lenders. Importantly, management stated that if a choice needs to be made between AUM growth rate and cost of borrowing, the latter will be prioritized – a very responsible stance.

Our Take: Ugro Capital, with its robust AUM growth, strategic acquisitions, and clear focus on high-yield, secured assets, positions itself as a Fast Grower with Strategic Vision. While current PAT growth is moderate, the underlying strategic shifts (Profectus acquisition, capital raise, focus on embedded finance, and deliberate moderation in disbursements for quality) are all aimed at significantly improving future earnings and ROA. The emphasis on managing the cost of borrowing and achieving a 4% ROA long-term is ambitious but appears achievable given the foundation being laid.

Key Takeaways for Investors 🎯

• Strategic Clarity: Ugro Capital is not just growing, it’s growing strategically, targeting high-yield, secured segments and leveraging inorganic opportunities.
• Quality First: The deliberate moderation in disbursements for quality in Q1 FY26 is a strong signal of responsible management.
• Capital Strength: The recent capital raise provides ample fuel for future expansion and cushions against potential headwinds.
• Future Growth Engines: The Profectus acquisition and the robust embedded finance pipeline offer clear pathways to enhanced AUM and profitability.
• Navigating Change: The company is actively adapting to new co-lending guidelines, which, despite short-term disruption, promise long-term benefits for the sector and Ugro.

Ugro Capital’s Q1 FY26 results underscore a company in transition – refining its growth strategy, strengthening its balance sheet, and optimizing its portfolio for sustained, high-quality expansion. For investors with a medium to long-term horizon, these strategic shifts present a compelling narrative in the domestic-growth-oriented Indian market.

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